Despite significant macro-economic headwinds and the finalisation of the yet to be signed new leasing policy by the Department of Public Works (DPW), Delta declared an interim distribution of 46.40 cents per share, representing a 1.02% increase to the prior year comparative period.

Delta Chief Executive, Sandile Nomvete comments: “We navigated unchartered waters during the past six months. The new leasing policy by the Department of Public Works is in its final stages of approval. Roughly a third of our leases to national government are continuing on a month-to-month basis in anticipation of the clarity that the new policy will bring as far as contractual rental escalations and lease terms are concerned.

“These results demonstrate the defensive nature of our portfolio: despite the pressure that the contraction in our weighted average lease period placed on the cost of capital and refinancing negotiations, we continued with lease renewals, signed new leases and grew the portfolio by 6.8% on a like-for-like basis.

“Earnings subsequently increased by 5.3% to R329.7 million, but is not reflected in the distribution per share as a result of more shares in issue following the Redefine transaction.”

The weighted average in-force escalation at half-year-end is 7.3% with a weighted average rental of R108.09.m2. Contractual rental income increased by 3.3% for the reporting period.

Debtors’ days remain well managed at 18.1 days, which the Fund says provides a strong indication of its ability to continue achieving contractual escalations and higher than budgeted for rental income until the conclusion of the DPW’s Leasing Policy.

Delta’s property portfolio as at 31 August 2017 is valued at R11.3 billion (including assets held for sale) and consists of 108 properties with a total gross lettable area (GLA) of 973 431m2. During the prior financial year, Delta concluded sale agreements and disposed of four non-core properties for an aggregate R139.1 million. Sale agreements for a further two assets totalling R373.8 million were concluded at financial year end, and are in the process of transferring. No new acquisitions were made during the six months under review.

The proceeds from the disposals will be utilised to reduce gearing, supplement capital expenses and invest in higher yielding assets.

Delta successfully renewed leases totalling 71 661m2 and signed new leases for 48 590m2. Vacancies increased to 11.3% of the portfolio, or 110 049m2 but is lower than the SAPOA national average of 11.8%.

“In the current constrained economic environment, there is a noticeable trend where corporates re-occupy the Durban CBD for their call-centre and back-office operations, given the lower rentals vis-a-vis prime areas, as well as the CBD’s proximity to key public transport nodes frequented by the bulk of their employees.

“Delta’s vacancy levels of 15.0% in its Durban node compares very favourably with the average of 18.5%, for example and we’ve recently completed a 10-year lease with Mr Price in the node,” adds Nomvete.

During the six-month period, Delta’s cost of debt increased marginally from 9% to 9.2%. It should however be noted that the expiring interest rate swap contracts were originally concluded at a historically low base. The Company expects further sovereign credit ratings downgrades and its current month-to-month lease profile to temporarily neutralise distribution growth, until the Leasing Policy is implemented and the empowerment transaction is concluded.

“We have made significant progress with the empowerment transaction that will inject much needed capital into the Fund,” comments Nomvete.

“Once successfully concluded, the transaction will increase the direct empowerment stake which will in turn qualify Delta for long-term leases with the DPW. The transaction will recapitalise the business, reduce reliance on debt funding and enable growth through yield accretive transactions,” he explains.

Going forward, the Fund says it will maintain full year distribution at the same level as the prior year, based on current trading conditions.

“Unlike the rest of the sector, we are dealing with known variables,” Nomvete concludes.

“It is unlikely that the DPW’s Leasing Policy will change materially, and we take courage from the considerable amount of certainty that will be gained once the Leasing Policy is signed into effect.

“In the interim, history has shown that we will continue to collect rental income until such time as the policy is implemented. At that stage, Delta will be in a position to re-engage shareholders on the empowerment transaction that will significantly improve Delta’s gearing.”